Rules in binary options trading are important and needed. Without rules and guidelines everything would descent into chaos. The foundations of civilized society would crumble under the weight of our own savage nature if we didn’t have rules. Even though not in such a dramatic manner, rules are also immensely important when it comes to binary trading. Not rules others set for you, but rules you set for yourself.
Trading strategies, responsible money management systems, effective financial operations – none of this would be possible if you don’t somehow restrain some of your impulses. We are not talking about random and arbitrary parameters you’re supposed to follow, though. The beauty of binary options is that the predefined set of rules you employ in your decision-making during a trade revolves around technical indicators and objective conditions and can, in reality improve your chances of success.
Let’s give you an example to make things a bit clearer. Imagine you’re trading the currency pair EUR/USD (note that this is just an example of how a potential strategy can work). Since you’re not new to such operations, you’ve done your homework and you’ve looked at the meaningful perimeters of past price fluctuations for the asset and you’ve noticed a certain trend upon looking at the 5-minute timeframe (the price fluctuations over every 5-minute interval) – if the price drops three 5-minute intervals in a row and then starts raising at the fourth, then in 65% of the cases it will be higher than the value it started at. This is a very interesting trend and it can easily help you form a feasible strategy. Let’s have a look at the strategy we can compose based on this data:
1. Step one would be spotting the trend. If the price of the asset is X in the beginning of the first 5-minute interval and drops below that value by the end of the same 5-minute interval becoming X-1 (where X is the original price and 1 represents the reduction value), then drops further from X-1 to X-2 (where 2 represents yet another drop value) by the end of the second 5-minute interval; then drops to X-3 by the end of the third 5-minute interval before it starts rising over X-3 before the end of the fourth 5-minute interval, then the chances of the asset’s price being higher by the end of the eighth 5-minute interval than it is at the end of the fourth 5-minute interval is 65%. This is the trend, anyway. Spotting this gives us a bit of an edge. In other words, if we see a drop in the first three 5-minute intervals, and then we notice a rise from the fourth onward, the chance of the value at the end of the eighth 5-minute interval being higher than the fourth is 65%.
2. Step two would be capitalizing on that information. We know the trend and we know that there is a 65% probability that we will win if we buy a call at the end of the fourth 5-minute interval with a 20-minute duration (so the expiration time is at the end of the eighth 5-minute interval). The chance of winning here is 65%. This doesn’t mean that you will win every time, naturally, but employing such a strategy is much better than betting blindly (as if you’re gambling). Have a look at the figure below if something remains unclear.
Naturally, if you employ this strategy every time you notice this trend, you will be right about 65% of the time. Notice that we didn’t give you an advice on how much to invest. This is deliberate – you can learn more about money management in our Money Management section.
As we’ve already said, what you saw above was just an example and not an actual strategy based on real data. We needed to show you that simply spotting a trend doesn’t constitute a strategy. Also, we feel obligated to warn you that if a strategy works well for you at one point in time, that doesn’t automatically mean that it will work forever. You need to constantly monitor and adjust your strategies if you don’t want end up losing a lot of money due to overconfidence. Binary trading isn’t easy. It requires lots of analysis and attention to detail, fine tuning your strategies, adjusting your funds and overall thinking about every single move you’re making.
You also need to remember that you are working with percentages, meaning that even the best strategy will cause you to lose sometimes. In our example, you will win 65% of the trades, but you will lose 35% so don’t ignore that fact. You need to be responsible with your money management in order to ensure that the 35% of the trades you lose don’t cause you bigger losses than the 65% of the trades you profit from.
Finally, a strategy should take everything into consideration. If you devise a good strategy on a smaller scale, don’t just assume that it will work on a larger scale (and vice versa). You need to always test a strategy from every angle before you employ it.